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Overview
Washington, Wall Street and their partners in crime, the media, have continued to spread the myths of an economic recovery since late summer 2009.

In response to the propaganda, the stock market has continued to rally. But most individual investors have been left out of this tremendous rally.

But that was NOT the case for subscribers of the AVAIA newsletter, as can be seen here (examine the market forecasting section; ever since my public recommendation to buy into the Dow at 6500, I have kept subscribers in the market since then for about 90-95% of the gains since then).

Yet, the economic data paints a different picture than the media presents. Make no mistake, we are seeing the early stages of what will written in history books as America’s Second Great Depression, just as I predicted in America’s Financial Apocalypse (2006).

Who are you going to trust? The media and their government hacks who have been wrong over and over, or someone who has been right about virtually everything over the past five years?

Who are you going to trust, people with clear political and financial agendas, or someone with neither?

Ever since the implosion of the largest real estate and credit bubble in history, I have published numerous unfortunate realities. See (1) and (2)

Since then, I have not altered these views. See (3) (4) and (5)

With the national debt approaching $13 trillion, no real improvements to the worst and longest recession since the Great Depression, blue chips slashing dividends for the first time in history (eg. DOW), century-old financial institutions now in bankruptcy (Lehman Brothers, Bear Stearns, Washington Mutual), trillions of dollars in bailouts, the largest year-over-year decline in GDP, state tax revenues and housing starts since the Great Depression, over 7 million foreclosures, an additional 7 million more foreclosures over the next 2 to 4 years, more than 8 million lost jobs with about 32 million Americans out of work, more than 40 million Americans on food stamps, a healthcare crisis that has not been addressed, a continuing trend of excessive inflation for food, energy and healthcare, and consumer spending coming to a halt…you can be assured of many things over the next several years:

Several more stimulus packages (which won’t offer any permanent assistance)
Soaring consumer loan defaults
Soaring commercial real estate defaults
Several million additional foreclosures
Rapidly rising and high interest rates
Muted real wage growth
Declining job quality
Lingering high unemployment for several years
Significant downside in the U.S. stock market
Continuation of employee benefit cuts
Continuation of healthcare inflation with millions more medical bankruptcies
A deepening of the entitlement crisis
Excessive inflation over an extended period OR massive inflation that will be countered by double-digit interest rates
A long period of muted consumer spending
Much higher taxes (not just income, but all taxes)
A worsening of America’s Second Great Depression, with up to two lost decades.
World War III

At best, the U.S. will continue to experience economic malaise for well over a decade. As the nation progresses through this treacherous period, any of the small improvements will be offset by longer-term issues that are virtually impossible to overcome.

Most of the 80 million baby boomers will never be able to fully retire. They did not have adequate retirement savings even before the economic collapse. Now they are in much worse shape. As a result, they will not only pull out of the stock market much faster as a means to survive, but they will be dead consumers.

Most states will continue to struggle with budget gaps for many years. This will lead to even more cuts to vital programs.

The entitlement tsunami will engulf Washington’s budget, causing a sustained period of massive deficits. This will be addressed by further cuts to benefits and premium hikes to Medicare and Medicaid.

The massive national debt will continue to threat the solvency of the U.S. This will lead to a long period of high interest rates even after the approaching interest rate surge, expected to mount within a couple of years.

A Broad Look at the Economy

Now let’s examine some facts about the economy.

The current recession is not only the most severe since the post-war period, but is or was (according to official statements that it has ended) the longest in duration, as illustrated by the first chart.

Furthermore, the “previous” recession (which is still in progress although Washington claims it is over) registered the worst year-over-year decline in GDP in decades.

At the close of January 2010, Washington reported GDP growth of 5.7% (revised down from 5.9%) for Q4 2009. This represents the biggest increase since 2003, which coincided with the market bottom of the previous recession.

This data is unreliable and has been inflated by debt spending. I have discussed the problems with GDP previously.

But where is the economic growth?

There is none.

Real Estate

Surely by now, real estate has started to pick up, right? Have a look at housing starts.

Now have a look at the mortgage resets. As you can see, the mortgage reset avalanche is gaining steam and will peak in early fall of 2011. This is going to flood the market with millions of additional homes as I have discussed on numerous occasions. See (6), (7), (8) and (9)

While I had forecast a bottom in median residential real estate prices in 2009 (the price decline which was consistent with my original estimate of a 30% to 35% decline first made in America’s Financial Apocalypse), this by no means a recovery in the real estate market.

For a variety of reasons, the climb back up to the previous highs reached in 2006 will take at least another ten years, as stated previously. See here.

Keep in mind that as interest rates rise, this will mute a good portion of any gains in real estate price appreciation.

Furthermore, as more foreclosures hit the market, prices will plunge, erasing any gains made.

In fact, the only places where the real estate market is doing well are the same places that didn’t get stuck holding Wall Street’s toxic assets; namely China, (although it did suffer some losses, especially from Citigroup) Hong Kong, Brazil, Australia and Canada.

As a reflection of the skepticism of the GDP data, the market sold off hard. Over a short period, the Dow approached a critical support at 9900 in early February.

Even Wall Street cheerleaders and economic hacks are admitting these latest numbers are not sustainable. They realize that they can no longer continue to spread the myth of a recovery while unemployment remains high, with no signs of trailing off for many years.

Since then, the Dow has staged an impressive rally as the propagandists worked overtime to keep the sinking ship afloat.

With the Dow now over 11,000, the “establishment” is still in control of the game. While there is likely to be a bit more upside in the market for 2010, investors should be looking for position exits rather than entries.

I do not have a crystal ball, but I do know a few things for certain. Even if the market holds current levels or even rises further (which appears to be likely), once interest rates begin to rise, the market will get hit hard. As you can imagine, this has adverse implications for the bond market exclusive of any further issues.

Why do I say this?

Because rates must rise by a large amount over the next few years, if not before.

Of course there are many other things that could send the market plummeting. Rising interest rates is just one example that we know will surface for sure. How much the market declines will depend on when and by how much rates are raised.

Another thing you should bank on is that the Federal Reserve will do all that it can to mitigate the downward market momentum as a result of interest rate hikes.

Why? Because, unlike the case with the European Central Bank which is focused on preventing inflation, the Federal Reserve’s priority remains with Wall Street. But as we have seen, what’s good for Wall Street is usually bad for Main Street.

Employment Data

The latest unemployment numbers came in at 9.7% (U-3). However, as I have discussed previously, this number really does not tell the full story. There are many assumptions that serve to boost U-3 data, such as the birth/death adjustment.

It is likely that if current unemployment data was properly adjusted for this highly inaccurate assumption alone, the real U-3 would stand at over 10.3%. But of course there are many other erroneous assumptions and deletions that make this data unreliable.

Layoffs peaked during Q1 of 2009, averaging 2.5 million in each of the three months, or 119,000 each business day! Think about that number for a minute.

Does that sound to you like a recovery is in place?

What makes the employment data even worse is the fact that new hires have continued to decline since reaching a peak in late 2006. What that means is that the total number of unemployed has continued to increase, as the following charts illustrate.

In December 2007, there were 5.1 million new hires. In October 2009, there were only 4.0 million new hires, representing a decrease of 22%.

What this data does not reveal is the duration of unemployed workers. As the next chart shows, this number has skyrocketed well beyond previous highs since the inception of recorded data in the late 1960s.

Layoffs slowing but No Hiring

Furthermore, it is much more important to consider the U-6 data. This number accounts for marginally employed (workers who are working part-time but want full-time work) and discouraged workers. While official U-6 data is also understated due to erroneous assumptions, it still provides a better indicator of the employment situation.

You should note that neither of these unemployment metrics factor in the number of work hours per week. As I have stated, employers typically reduce work hours during recessions.

Accordingly to government data, the number of unemployed Americans stands at around 16 million, with the U-6 population of unemployed and underemployed at nearly 26 million. My own estimates for U-3 and U-6 are 18 million and 32 million respectively.

Now let’s have a closer look at the most recent employment data. The following tables show the percentage unemployed for each duration. The first table shows the percentage of unemployed for 15 weeks or more.

As the first table shows, 60.5% of unemployed Americans have been out of work for 4 months or longer.

Seasonally Adjusted
Series title: (Seas) Of Total Unemployed, Percent Unemployed 15 Weeks & over
Labor force status: Unemployed
Age: 16 years and over
Duration : unemployed/laid off: 15 weeks and over
Percent/rates: Percent of unemployed within group

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec
2000	24.3	22.3	22.3	22.5	22.8	22.3	23.7	23.9	23.0	24.1	23.4	23.6
2001	23.0	24.4	24.3	23.2	24.0	24.1	25.5	26.5	27.3	27.0	29.1	29.5
2002	31.3	31.9	32.5	32.9	35.3	36.0	35.6	34.6	35.9	36.6	36.0	37.6
2003	36.8	36.9	36.9	38.0	37.1	38.6	40.5	39.6	38.9	39.4	39.8	40.2
2004	40.0	40.0	39.5	36.4	37.8	38.2	35.9	35.3	36.6	37.7	37.3	36.8
2005	36.6	36.3	36.9	Copyrights © 2025 All Rights Reserved AVA investment analytics

Update on America's Second Great Depression (Part 1)